What Is Libor Scandal

What is LIBOR Scandal

In June 2012, Barclays was involved in alleged manipulation of London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR) scandal .The scandal led to more serious manipulation events in the whole world afterward. These violations reflected not only the defects of the mechanism, but also a huge loophole in regulation.

June 29, 2012, Barclays Bank reached a settlement to the United States Commodity Futures Trading Commission, the US Justice Department and the UK Financial Services Authority on its alleged manipulation of LIBOR and EURIBOR scandal. According to the investigations from the three regulatory agencies, Barclays bank executives and traders requested quoters manually adjusted LIBOR and EURIBOR rates for more than 257 times from year 2005 to 2009. They tried to raise or lower interest rates in order to increase profits from derivatives transaction or to mitigate the losses. In the end, Barclays agreed to pay the fine of 290 million GBP (equivalent to 450 million US dollars). In terms of the lawsuit against LIBOR manipulation to Barclays Banks, US Municipality sued Libor setting banks for the manipulation of LIBOR. Since municipalities started adopted interest rate swaps to hedge their municipal bond sales in the late 1990s, they used variable interest rate which typically had interest rates as much as one percentage point lower than fixed interest rate. States and localities bought $500 billion in interest rate swaps to hedge their municipal bond sales. It is estimated that the manipulation of LIBOR cost municipalities at least $6 billion. However, this was because most interest rate swaps are linked to the Libor interest rate, while municipal bond rates are linked to the SIFMA Municipal Bond Index interest rate. These losses were in addition to $4 billion that localities had already paid to unwind backfiring interest rate swaps.

Since the incident occurred, the scandal of LIBOR manipulation continued to simmer. The US, EU, Japan, Canada and other countries regulators started the investigation and found out dozens of US and European financial institutions have been involved in widespread systematic fraud. Obviously, the loopholes in mechanism seriously hurt public confidence toward the financial sector.

Impact of the LIBOR manipulation

Since 1986 LIBOR was adopted, it has been an important financial indication of the market. It has a direct impact to the pricing of interest rate swaps, commercial and industrial loans, personal loans, mortgages, other financial products, and monetary policy as well. According to the data from U.S. Commodity Futures Trading Commission, securities and loans transactions which